States' online 'Amazon tax' fight may land in U.S. Supreme Court: lawyers

A worker checks a shipment of outgoing boxes at the Amazon.com warehouse facility in New Castle, Delaware, November 24, 2006. REUTERS/Tim Shaffer

WASHINGTON (Reuters) - Diverging high court rulings in New York and Illinois over ‘Amazon taxes’ point to a possible U.S. Supreme Court case to settle questions about the legality of states taxing online retail sales, lawyers said on Monday.

With Congress failing to take action on the issue, courts have been intervening case-by-case in a long-running struggle between state governments and major online retailers, including Amazon.com Inc, over sales tax.

On Friday, the Illinois Supreme Court voided a state law attempting to collect sales taxes from online purchases. A trade group representing Amazon and other online businesses had challenged the state’s online sales tax in court.

In New York, though, the state’s high court decided earlier this year that Amazon and Overstock.com Inc could be compelled by the state to collect tax from online sales. Amazon and Overstock have appealed to the U.S. Supreme Court. New York has until Wednesday to file its response.

Different decisions in different states improve the odds that the Supreme Court will tackle this issues, said Stephen Kranz, a partner at law firm McDermott Will & Emery.

“There will continue to be additional litigation at the state level exacerbating the problem,” Kranz said. “That is clear and should be a factor considered by the court in deciding whether to take the New York or Illinois case.”

The Supreme Court accepts only a small portion of the thousands of petitions it gets each year, but it is often more inclined to step in when lower courts disagree. If the New York case were taken, oral arguments could come by April.

“The Illinois Supreme Court acknowledged the New York decision, but ruled for a different reason, setting up a possible challenge to the U.S. Supreme Court,” said David Blum, a partner at law firm Levenfeld Pearlstein LLC.

TAX SPREADS

Seattle-based Amazon has been fighting one-on-one battles with the 50 states for years over sales tax.

The United States has no national sales tax and Congress has not moved ahead with proposed legislation that would give all states the power to enforce their sales tax laws on Internet retailers.

Amazon supports federal legislation for nationwide state sales tax enforcement, but other online retailers, including eBay Inc and Overstock.com Inc, have fought it.

“We’ll continue working with states, retailers and Congress to get federal legislation passed,” said Amazon spokesman Ty Rogers in an emailed statement on Friday.

The Illinois court decision “shows that federal legislation is the only way to resolve the sales tax issue and protect states’ rights to make their own revenue policy choices,” he said.

Wisconsin on November 1 will become the 14th U.S. state to begin collecting sales tax on Amazon purchases. The state can start assessing the tax because Amazon is opening a distribution center in Kenosha, giving it a physical presence in Wisconsin.

SUPREME COURT‘S 1992 RULING

Under a 1992 Supreme Court decision, retailers without a physical presence in a state do not need to collect and remit taxes in that state on each sale. Consumers are supposed to pay the tax on their own, but very few do.

In states where Amazon has no physical presence, the company does not generally collect the tax, giving it a pricing edge over traditional bricks-and-mortar merchants.

West Virginia this month started collecting tax on Amazon sales; and Virginia did so last month. Other states are fighting in court for the right to collect the tax.

Amazon’s web site lists 13 states where it collects sales taxes and forwards the proceeds to states: Arizona, California, Georgia, Kansas, Kentucky, New Jersey, New York, North Dakota, Pennsylvania, Texas, Virginia, Washington and West Virginia.

For years, Congress has debated legislation to grant states the power to tax online purchases. In May, the Senate approved a bill, but it has stalled in the House of Representatives.